Another trillion dollar fraud

I don’t pretend to know anywhere near enough — in terms of either raw information or expertise — in order to opine on the necessity or lack thereof of The Latest Plan in terms of whether the alternatives are worse. But what I do know is that an injustice so grave and extreme that it defies words is taking place; that the greatest beneficiaries are those who are most culpable; and that the same hopelessly broken and deeply rotted institutions and elite class that gave rise to all of this (and so much more) are the very ones that are — yet again — being blindly entrusted to solve this.

Of course the non-financial toll of the Terror War makes it a far greater tragedy, but the financial tab of each will be of the same order of magnitude — US$trillions.

Although the US$0.7 trillion number being cited is apparently made up, Barry Ritholtz’s guess that it could end up costing US$1.5 trillion is entirely plausible, given the systematic underestimation by politicians of wars and public works. Ritholtz’s upcoming book on bailouts will presumably have data on the misunderestimated (really) cost of bailouts. Watch his brief WSJ video interview or on his own blog.

The issue is not whether the current crisis will cost trillions. One way or the other, the crisis will cost trillions. A no-intervention solution will not “cost less” through some form of magic. The ripple effect of the failures will “cost” any way one slices it.

The issue is whether the way in which the cost is spread across society can be timed and slowed through direct intervention. That will remain to be seen, but I believe that as flawed as it is, the bailout package will nonetheless positively impact the way the damage is experienced.

Although there are political incentives for real estate purchase embedded here and there, including in the tax code, the culprit here, as in 1893, as in 1929, is less about government and more about unfettered greed and maljudgment. The problem is that when institutions are “too large to fail”, then intervention is required. It would be possible to create a financial system in which no institution was “too large to fail”, but it would require a re-configuration of the capital markets.

Perhaps the real lesson here is that lack of fiscal discipline by the federal government and the fed merely fueled a climate of “invest in the bubble”, which has almost brought our whole economy down. No matter how much government one favors, if a government uses state leverage (other than in wartime) to fund money for speculators, this is the inevitable result.